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August 12, 2014 7:34 pm
At Fyffes’ annual meeting in Dublin in May, executive chairman David McCann extolled the virtues of the Irish banana distributor’s proposed merger with Chiquita to create a global fruit operator with combined sales of about $4.5bn.
Under the heading “Best of Both”, he highlighted the combined groups’ complementary product mix, management expertise, equity value of $1bn and target of $40m in annualised cost synergies.
That scenario is threatened by this week’s unexpected hitch in the all-share merger – a cash counter-offer of $611m for Chiquita from Cutrale, the leading producer of oranges in Brazil, and Joseph Safra, the billionaire Brazilian banker. Losing Chiquita would not affect the day-to-day business of Fyffes. But it would leave the Irish group with a strategic quandary.
The Chiquita/Fyffes merger, unveiled in March, was a sign that the two companies needed each other. Profit margins at fruit distributors have been eroded by price wars among supermarkets, which use bananas as loss leaders. Retailers are also striking purchasing deals directly with producers, cutting out the distributors.
Fyffes and Chiquita had a better chance of weathering those market forces together. If Cutrale and Mr Safra buy Chiquita, Fyffes will have to rethink its strategy.
It has two key advantages in that event. It is Europe’s biggest banana distributor regardless of the fate of Chiquita, and it has a strong balance sheet with almost no debt. Analysts say Fyffes, with a market capitalisation of €270m, is probably not able to make a cash counter-offer for Chiquita that trumps the one from Brazil. David Holohan, head of research at Merrion Capital, a Dublin brokerage, says: “Fyffes can defend the original merger case. It does not have the financial capacity to launch a [rival] cash offer.”
Chiquita’s shareholders have been lukewarm about the merger with Fyffes. The US group’s shares fell a fifth between March and this week. But shareholders in the Irish company loved it. Fyffes’ shares rose 40 per cent on the announcement because of the value the deal offered its investors – a near 50 per cent stake in a much bigger company.
Fyffes’ shares tumbled 20 per cent at one point on Monday after the Brazilian offer for Chiquita emerged. That was partly the result of merger arbitrageurs bailing out. But it also reflected how disappointed shareholders were that the merger might not happen. Its shares closed down 1 per cent yesterday.
Mr McCann’s trump card in keeping the Chiquita deal alive is to stress the synergies it would offer, analysts say. These include centralised cost savings as the two groups combined purchasing and operations.
Cutrale and Safra say their offer has more value for Chiquita and is less risky. People involved in the deal say investors in the US group have turned against the Fyffes merger since it was announced, as the terms – Chiquita investors got just more than 50 per cent of a combined group – are unfavourable.
Another source of confidence is the Brazilians’ ability to make an all-cash offer with hefty backing. Mr Safra, a discreet negotiator in his seventies, has an estimated net worth of $16bn. The McCann family behind Fyffes is rich, too. But not in that league.
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